Download What is the Balance Sheet?

Finanacial Statements
Balance Sheet
&
Profit and Loss Account
• A financial statement is a collection of
data organised according to logical and
consistent accounting procedures.
Four Basic Financial statements:
•
•
•
•
Balance Sheet
Income Statement
Statement of Cash Flows
and a newer one -- Statement of
Owner Equity
Balance Sheet Purpose
• Determines solvency of businessability to meet both long term and
short term obligations
• Gives concise summary of firm’s
resources and obligations
• Gives a measure of firm’s liquidity
Balance Sheet basic Principles
• The balance sheet is regarded as a separate
accounting entity( entity concept)
• The figures are expressed in monetary units
(monetary concept)
• The balance sheet assumes that the company is a
going concern (going concern concept)
• The fixed assets are stated at cost less
depreciation ( cost concept)
• The current assets are stated at cost or market
value, whichever is lower (conservative concept)
• Assets are equal to liabilities (dual aspect
concept)
The Balance Sheet
• Name -- What does this represent?
– Partnership, individual, combined
– Needs to be consistent over time
• Date -- This is as of what date? (Snap
Shot)
• Listing of all assets and all liabilities
• Balances at the bottom of form
• Assets - Liabilities = Equity
XYZ Co
As on 31.3.2011
Liabilities
Current Liabilities
- Accounts payable
- Interest payable
- Salary payable
Long Term Liabilities
Equity
Assets
Current assets
- Cash
- Inventories
- Debtors
Fixed assets
Investments
Balance Sheet
Asset Types
• Current assets
– Consumed or converted to cash in 12 months
e.g. Inventory, prepaid expenses, cash,
savings
• Long Term or Fixed assets
– e.g. land, buildings, stocks
– Selling would typically decrease volume or
size of business
Asset Value Determination
• Book Value (cost basis)
– Useful for trend analysis
• Fair Market Value
– Useful to determine liquidation value
Balance Sheet
Debt Types
• Current liabilities
– To pay in the next 12 months e.g. bills, accrued
interest, taxes
• Long Term
– Scheduled originally to be paid in more than
one year e.g. land debt, house payments
Parts of the Balance Sheet
(Current)
Liabilities -- What you owe someone else (against what you own)
• Current Liabilities
– What you are scheduled to pay in the
next 12 months
– Unpaid bills, accrued interest, property
taxes
– Operating loans
– Principal payments on term debts to be
made in the next 12 months
Parts of the Balance Sheet
(Long Term)
Liabilities -- What you owe to someone else (against what you own)
• Long Term Liabilities
– What was scheduled originally as more
than one years
– Land debt, house payments
– Match up to the long term assets
Equity
• Preferred Stock (cumulative, Non cumulative,
convertible, cumulative convertible)
• Common Stock or ordinary shares
• Contributed capital in excess of par
• Retained earning
-
Revenue reserve: from profit of normal business operations
Capital reserve: Premium on issue of shares or gains on
revaluation of assets
Debentures
• Convertible
• Non convertible
How to Build a Balance Sheet
1) Do a count: Current, Long Term,
2) 2) Rupee Prices for each of the above.
Recommend both cost and market value for term
assets
Take out a Piece of Paper
Draw some lines and label like this:
Assets
Current
Liabilities
Current
Investments Equity
Long Term
Long Term
What is the Balance Sheet?
• Picture in time -- a specific point, as in
31.3.20XX.
• Shows financial position--ability to handle
risk
• Net result of past
• Very important component to track and
monitor financial progress
• Basic building block for financial analysis
What a Balance Sheet is
NOT
• Does NOT necessarily tell you if the
business is making money
• Does NOT tell you where net worth
came from
Change in Net Worth
due to:
• Retained Earnings
– from profits earned and retained in
business
• Market Valuation Equity
– from change in market value of assets
Valuation Equity
Rupee of asset value that are created
because the market value of term assets
is greater than the book value
Calculated by:
+ Total assets @ Market Value basis
- Total Liabilities inc. Contingent Liabilities
- Retained Earnings (contributed Capital)
Profit and Loss Account
• It is a report of a firm’s activities during
a given period of time
• It shows revenue and expenses of the
firm, the effect of interest and tax, and
the net income for the period
Functions of P& L Account
• Gives concise summary of firm’s
revenue and expenses
• Measures firm’s profitability
Measuring Earning
• Accrual accounting:
- Identify revenue
- Matching the corresponding cost to
revenue
• Revenue occurs when the earning
process is complete and an exchange
has taken place
Depreciation
• It is a non cash charge used to match
expenditure of creating asset with
resulting revenue.
• Three estimate are required to calculate
depreciation:
- Assets useful life
- Its salvage value
- Method of allocation (straight line, WDV)
Expense Recognition
• Principle of associating cause and effect
• Principle of systematic and rational
allocation (depreciation)
• Immediate recognition principle (selling
and administrative expenses and all
losses